Exam May 2016, questions PDF

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Exam May 2016, questions...

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Cass Undergraduate School BSc (Hons) Degree in Actuarial Science

AS1071

Introduction to Economics [CT7]

Subject CT7 of the Institute and Faculty of Actuaries Examinations Part 1 Examination Important note for students regarding past exam papers Past exam papers are published for illustrative purposes only. They can be used as a study aid but do not provide a definitive guide to either the format of the next exam, the topics that will be examined or the style of questions that will be set. Students should not expect their own exam to be directly comparable with previous papers. Remember that a degree requires an amount of self-study, reading around topics, and lateral thinking – particularly at the higher level modules and for higher marks. Specific guidance for your exam will be given by the lecturer.

23rd May 2016

10:00 – 13:00

Instructions to students: Candidates must answer ALL TWENTY FIVE questions in Section A and ANY TEN questions from FIFTEEN in Section B. Do not answer more than 10 questions in section B as only the first 10 will be marked. Section A carries 50 marks and Section B carries 50 marks. In Section A each correct answer will be awarded 2 marks. Questions not attempted and incorrect answers will be awarded 0. The answer sheet for this section is separate to the answer booklet and should be distributed by your invigilator. The instructions for completion are on that form and must be adhered to strictly. Your complete answer sheet must be inserted into your answer booklet prior to leaving the exam room. NB.there is no MCQ section in this sample paper. This examination paper consists of 12 printed pages including the title page. Materials: Number of answer books to be provided: 1 Only the Casio calculators FX-83 (MS, ES or GT+) or FX-85 (MS, ES or GT+) Page 1 of 6

are permitted for use in this exam. Multiple Choice Questions answer sheet. Dictionaries are not permitted. This examination paper may not be removed from the examination room. External Examiner: Mr Niall Franklin Internal Examiner: Prof Keith Pilbeam Section B Short Answer Section 5 marks per question

Question 26 Explain with the aid of diagrams the equilibrium level of output in the Cournot model. (5 marks) Question 27 Briefly explain with the aid of a diagram (or diagrams) why a firm operating in a monopolistic competition environment will make only normal profits in the long run, even though it is making excess profits in the short run. (5 marks) Question 28 Briefly explain, with the aid of a diagram depicting total revenue, total cost and the derived total profit function, the difference between a profit maximising firm’s output and a sales maximising firm’s level of output. On the diagram show what the introduction of a minimum level of profit requirement that is higher than the profit obtained under the sales maximising firm’s output do to the output of the firm. (5 marks) Question 29 Briefly explain the law of diminishing returns and discuss its relevance to the short run average cost curve. (5 marks) Question 30 (i)

Examine with the aid of a diagram, the effect on the price and output of a perfectly competitive industry if it becomes a monopoly industry with an unchanged cost structure. (2.5 marks)

(ii)

If we allow the monopoly industry to have lower marginal costs than the perfectly competitive industry might this affect the qualitative results obtained in part (i)? (2.5 marks) Page 2 of 6

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Question 31 Draw a diagram to show the income and substitution effects of a fall in the price of Good X which is an inferior good but not a Giffen good. Discuss the income and substitution effects and the slope of the demand curve. (5 marks) Question 32 Explain with the aid of numerical examples how Game theory can result in two firms setting prices that are not in their mutual interests and how agreeing to higher prices can lead to higher joint profits. (5 marks) Question 33 Explain the impact of a £200 million pound increase in government expenditure on national income in the following three cases. In your calculations use the following data where appropriate; the marginal propensity to consume is 0.6; the income tax rate is 50 per cent of all income and the marginal propensity to import is 0.2

(i)

a closed economy multiplier with no income taxes. (1 mark)

(ii)

a closed economy multiplier with government income taxes. (2 marks)

(iii)

an open economy multiplier with no government taxes. (2 marks)

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Question 34 Given the following data on simple closed economy: C = 10 + 0.75 Y I = 20 G = 40 Where C is consumer expenditure, Y is national income, G is government expenditure on goods and services, I is investment expenditure. (i)

What is the equilibrium level of national income? (2 marks)

(ii)

What is consumer savings at the equilibrium level of national income? (1 mark)

(iii)

What is the value of injections at the equilibrium level of the national income? (1 mark)

(iv)

What would be the new level of national income if government expenditure increased by 10 million? (1 mark)

Question 35 Discuss what is meant by crowding out effect of fiscal policy. (2 marks) Discuss three mechanisms through which crowding out can occur. (3 marks) Question 36 Explain the five policy measures that policy makers of a country running a fiscal deficit can undertake to reduce the deficit or finance it. (5 marks) Question 37 Using the supply and demand of labour and the accept jobs schedule, explain the the impact of a reduction in social security for unemployed workers on the level of employment in the economy and number of voluntarily unemployed. (5 marks)

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Question 38 (i)

Using an IS/LM diagram briefly explain the likely effects of a fiscal contraction on both the domestic interest rate and the level of economic activity. (2.5 marks)

(ii)

Using a second IS/LM diagram briefly explain the likely effects of a monetary contraction on both the domestic interest rate and the level of economic activity. (2.5 marks)

Question 39 Explain with the help of the aggregate supply and demand diagram the impact of an expansionary monetary policy and the resultant demand pull inflation. In your answer consider possible effects on wages. (5 marks) Question 40 “In an open economy with perfect capital mobility and a fixed exchange rate, an expansionary monetary policy is ineffective at raising real output.” Explain this using an IS-LM-BP diagram. (5 marks)

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